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Advertising and Conspicuous Consumption

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Author Info
Daniel Krähmer (Freie Universität Berlin, Institut für Wirtschaftstheorie, Boltzmannstr. 20, 14195 Berlin, Germany, +49-(0)30-83855223, kraehmer@wiwiss.fu-berlin.de)
Abstract

The paper formalizes the intuition that brands are consumed for image reasons and that advertising creates a brand’s image. The key idea is that advertising informs the public of brand names and creates the possibility of conspicuous consumption by rendering brands a signalling device. In a price competition framework, we show that advertising increases consumers’ willingness to pay and thus provide a foundation, based on optimization behavior, for persuasive approaches to advertising. Moreover, an incumbent might strategically overinvest in advertising to deter entry, there might be too much advertising, and competition might be socially undesirable.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 72.

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Date of creation: Aug 2005
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Handle: RePEc:trf:wpaper:72

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Related research
Keywords: Advertising; Entry Deterrence; Brands; Conspicuous Consumption; Bertrand Competition; All-Pay Auction;

Find related papers by JEL classification:
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics. [Downloadable!]
    Other versions:
  2. Kyle Bagwell & Garey Ramey, 1988. "Advertising and Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 59-71, Spring. [Downloadable!] (restricted)
    Other versions:
  3. Belk, Russell W, 1988. " Possessions and the Extended Self," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 15(2), pages 139-68, September.
  4. Richins, Marsha L, 1994. " Special Possessions and the Expression of Material Values," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 21(3), pages 522-33, December.
  5. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113. [Downloadable!] (restricted)
  6. Wolfgang Pesendorfer, 1993. "Design Innovation and Fashion Cycles," Discussion Papers 1049, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  7. Solomon, Michael R, 1983. " The Role of Products as Social Stimuli: A Symbolic Interactionism Perspective," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 10(3), pages 319-29, December.
  8. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October. [Downloadable!] (restricted)
  9. Avinash Dixit & Victor Norman, 1978. "Advertising and Welfare," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 1-17, Spring. [Downloadable!] (restricted)
  10. Coelho, Philip R P & McClure, James E, 1993. "Toward an Economic Theory of Fashion," Economic Inquiry, Oxford University Press, vol. 31(4), pages 595-608, October.
  11. McCracken, Grant, 1989. " Who Is the Celebrity Endorser? Cultural Foundations of the Endorsement Process," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 16(3), pages 310-21, December.
  12. Ishigaki, Hiroaki, 2000. "Informative advertising and entry deterrence: a Bertrand model," Economics Letters, Elsevier, vol. 67(3), pages 337-343, June. [Downloadable!] (restricted)
  13. Corneo, Giacomo & Jeanne, Olivier, 1997. "Conspicuous consumption, snobbism and conformism," Journal of Public Economics, Elsevier, vol. 66(1), pages 55-71, October. [Downloadable!] (restricted)
  14. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-73, June. [Downloadable!] (restricted)
  15. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August. [Downloadable!] (restricted)
    Other versions:
  16. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
  17. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September. [Downloadable!] (restricted)
  18. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 465-91, October. [Downloadable!] (restricted)
  19. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May. [Downloadable!] (restricted)
  20. Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August. [Downloadable!] (restricted)
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